What’s in a (Brand) Name? A Comparison Of Minimum Wage Effects on Franchise and Non-Franchise Businesses

One unique feature of recent local minimum wage battles is the focus on franchise businesses.

In Seattle, for instance, a minimum wage of $15 took effect in 2015 with multiple phase-in paths that depend on the business size (as measured by number of employees), with smaller businesses being granted more time to adapt to the mandate. Under the Seattle law, an independent, locally-owned franchise business is treated like the larger corporate entity from which the franchise business gets its brand-name and trademark.

Justifying this treatment, Brian Surrat, director of the city’s Office of Economic Development, stated “franchises are different, in that they are part of a network, with built-in economies of scale and support with advertising, supply chain management and menus.” Similarly, Washington State’s Attorney General Robert Ferguson, in a brief defending Seattle’s law before the 9th District Court of Appeals stated, “franchisees enjoy a unique economic advantage that gives them the ability to more easily absorb an accelerated wage phase-in.”

In fact, a new national survey of mostly-small businesses shows that minimum wage increases being considered by some cities will likely have a more negative impact on franchise businesses. Conducted by Dr. Lloyd Cordor for the Employment Policies Institute, this survey of franchise business owners (n=307) and non-franchise business owners (n=305) focused on eight key industries such as restaurants and hotels that typically have a larger share of minimum wage employees.

The survey finds that franchise businesses are more likely to employ minimum wage workers than other businesses, and are more likely to take offsetting steps to manage the increased labor costs.

At businesses such as quick service restaurants and hotels, the impacts are even greater on franchise business owners than non-franchise business owners. More than 80 percent of franchise quick service restaurant owners said they are likely to reduce hiring compared to 58 percent of non-franchise quick service restaurant owners. Nearly 90 percent of franchise hotel owners said they are likely to raise room rates compared to 70 percent of non-franchise hotel owners.

In other survey results, 86 percent of franchise business owners who were able to answer the question said they will not be able to renegotiate contracts with their franchisor to absorb the increased labor cost, and nearly 80 percent of the same said that the royalty fees they currently pay for advertising, marketing and other services can’t be reduced without having to pay for those costs themselves.

In 2016, policymakers at the city and state level will face a familiar trade-off when deciding whether to raise the minimum wage: Higher wages for some employees versus lost jobs for others. If they decide that the lost jobs are worth it, however, these survey results suggests that there’s no rationale for treating franchise businesses differently than other small businesses in the final wage law and that doing so would exacerbate the negative consequences typically associated with wage increases.